چکیده انگلیسی

In this paper, we empirically examine if sovereign risk matters for corporate bonds in developed economies. Using a unique panel data sample of 897 corporate bonds from eleven countries within the Economic and Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads). In the time period from March 2006 to June 2012, we find sovereign risk to be a significant driver of corporate risk. The effect is stronger for companies with domestic revenue structure, for companies that are (partly) owned by the government, and companies active in the utility and transportation sector. Interestingly, the impact of sovereign risk on corporate risk during the acute European sovereign debt crisis period decreases if ratings are examined, but increases if z-spreads are utilized. Rating agencies seem to take a more differentiated view on individual company risk during the sovereign debt crisis, while institutional investors might want to reduce their exposure to a country in financial distress as a whole, regardless of whether sovereign or corporate bonds are held.

مقدمه انگلیسی

The analysis of sovereign risk—the risk that a country will default on its debt—and its impact on corporate risk has been subject to an increasing number of empirical examinations (e.g. Borensztein et al., 2007, Cavallo and Valenzuela, 2010, Dailami, 2010, Dittmar and Yuan, 2008, Durbin and Ng, 2005 and Grandes et al., 2007). These studies have mainly focused on emerging market economies, since the United States (US) and most developed countries in Western Europe have been perceived as bearing negligible sovereign risk in the past. This perception has significantly changed since the beginning of the sovereign debt crisis of the Economic and Monetary Union (EMU) in 2010, with deteriorating sovereign ratings and widened credit spreads for several countries within the EMU.
Studies that have focused on developing countries have highlighted the important role of sovereign risk when determining corporate risk. These studies focus on either sovereign ratings and their link to corporate ratings (e.g. Borensztein et al., 2007 and Ferri and Liu, 2002) or the influence of sovereign bond primary (at issue) or secondary spreads on corporate bond spreads (e.g. Cavallo and Valenzuela, 2010, Dailami, 2010, Dittmar and Yuan, 2008 and Grandes et al., 2007).
Our study contributes to existing research in several ways. This is the first study that uses z-spreads instead of conventional yield spreads for corporate and sovereign bonds. Therefore, we are able to account for the term structure of interest rates, which is critical for the reliability of results. The use of conventional yield spreads is one of the major drawbacks from previous studies and leads to the unrealistic implicit assumption of a flat yield curve.1 Second, this is the only study to our knowledge that focuses exclusively on developed countries' bond markets when examining the influence of sovereign risk on corporate risk. There are several reasons why the EMU is the ideal—and probably only—framework within which to address our research questions. Since the corporate and sovereign bonds in our data sample are all denominated in Euro, we do not have to control for risks arising from different currencies for bonds from different countries, and thus can study the effect of sovereign risk on corporate risk more directly. In addition, there have been very divergent developments of sovereign risk in the EMU countries over the time period considered. This—in contrast to a sample focusing only on countries with negligible sovereign risk—is a prerequisite for conducting our study. Third, we draw our conclusions from both ratings and z-spreads, which allow for a more comprehensive view when examining how sovereign risk transfers to corporate risk. We also include a battery of control variables and explicitly control for liquidity. These enhancements in the empirical setup help to overcome the methodological drawbacks of previous studies, as outlined by Grandes et al. (2007). Although it is not the main objective of this paper, our study also adds to the growing literature focusing on the decomposition of the credit spread.
This paper investigates the following research questions: How important is sovereign risk in determining corporate bond ratings and corporate bond z-spreads in developed countries? How robust are these findings to the inclusion of bond-specific, firm-specific, country-specific and global control variables that have explained corporate bond ratings and credit spreads in previous studies? Has the importance of sovereign risk increased or decreased over time, especially with regard to the acute sovereign debt crisis that started in early 2010 with the first Greek bailout package? Are companies in different countries (e.g. in Southern European crisis states) affected differently by sovereign risk? What company-specific characteristics influence the effect of sovereign risk on corporate risk?
Theoretically, there are several linkages between sovereign and corporate risk, and several channels via which sovereign risk can spill over to the private sector (see e.g. Ciocchini, 2002, Durbin and Ng, 2005, Borensztein et al., 2007 and Dailami, 2010). First of all, the government and a company within the same country depend on the same underlying macroeconomic risk factors, and are therefore jointly subject to the direction and intensity of the economic development in that country (see e.g. Ciocchini, 2002 and Durbin and Ng, 2005). There might be a contagion effect if investors' reduced risk appetite for securities issued by distressed sovereigns also translates to corporates and dries up liquidity in both sectors (see Dailami, 2010). Insurance companies or banks could be forced to liquidate holdings in sovereign and corporate bonds if the sovereign rating falls below a certain internal or regulatory-determined threshold rating (see Ağca and Celasun, 2012 and Office of the Comptroller of the Currency, 2008). Transfer risk describes how actions taken by a distressed sovereign may directly affect corporates and their ability to fulfill their debt obligations, thereby transferring (part) of the sovereign solvency problems to the private sector (see Durbin and Ng, 2005 and International Monetary Fund, 1991). Sovereigns might introduce foreign exchange controls (which impacts debt service on foreign-currency-denominated debt) or the socialization of private assets (see Ciocchini, 2002 and Durbin and Ng, 2005). In addition, they might be forced to significantly reduce their demand for products and services provided by corporates, increase taxes or cut subsidies.
The implications of transfer risk translate to major rating agencies' guidelines, which impose the concept of a sovereign ceiling. The strictest definition of sovereign ceiling states that a company may never have a higher rating than the sovereign. In its original interpretation the sovereign ceiling relates to foreign-currency-denominated debt issues, and transfer risk to the risk of foreign exchange controls imposed by the government in the case of sovereign default (see Grandes & Peter, 2005). As it is not the main purpose of this study to test for a sovereign ceiling we use the more general definition of transfer risk outlined in the previous section. The principle of the sovereign ceiling was followed strictly until 1997, when exceptions were made for several Latin American countries. Companies in these countries tapped dollarized capital markets, and foreign exchange controls—considered the main theoretical foundation of the sovereign ceiling according to Borensztein et al. (2007)—became less likely. A Standard and Poor's publication on the sovereign ceiling for the EMU, as of June 14, 2011, is of special interest for our study. It states that companies in the EMU are less exposed to sovereign risk compared to companies in other regions, mainly due to “increasing integration… [and] lesser foreign exchange risk than outside the EMU.” The maximum rating differential between non-sovereign issuer and related sovereign is six notches (see Standard & Poor's, 2011).
Despite the (theoretically) lower exposure of EMU companies to sovereign risk compared to other regions, we find that sovereign ratings have significant influence on corporate ratings. Results are robust to the inclusion of a battery of control variables which are affecting corporate bond ratings and which are grouped into company-specific, country-specific (macroeconomic) and global factors. The impact of sovereign ratings is higher for corporate bonds issued by companies subject to government influence and with a domestic revenue share of more than 50%. We also investigate a sub-period that starts with the beginning of the critical phase of the EMU sovereign debt crisis in early 2010. The influence of government ratings on corporate ratings is lower in this period than in the critical phase of the financial (subprime) crisis after the collapse of Lehman Brothers in September 2008. The share of corporate ratings that are higher than corresponding sovereign ratings is also the highest in the sovereign debt crisis phase starting in early 2010. Interestingly, we find no significantly higher influence of sovereign ratings on corporate ratings for Southern European crisis countries (Greece, Italy, Portugal and Spain).
Due to the strong correlation between corporate bond ratings and corporate bond spreads (see also Borensztein et al., 2007), we also expect sovereign bond spreads to contribute to explaining corporate bond spreads. For every corporate bond in our sample, we carefully select the corresponding sovereign bond with the closest maturity and collect daily z-spreads from Bloomberg.2 Indeed, we find sovereign bond z-spreads to have a statistically highly significant influence on corporate bond z-spreads. Again, the influence is more pronounced for companies subject to government influence and with a domestic revenue share of more than 50%. Interestingly, and in contrast to our analysis of corporate bond ratings, the influence is higher during the sovereign debt crisis critical phase starting in early 2010. It seems that investors also consider corporate bonds issued by companies with corresponding sovereigns in distress to be disproportionately risky. They withdraw money from both (sub-)asset classes, while rating agencies seem to undertake a more sophisticated evaluation of corporate risk. In line with these findings, we also find that sovereign z-spreads have a higher influence on corporate z-spreads for Southern European crisis countries. Our results also clearly indicate that the effect of sovereign risk has to be considered in any study that models corporate bond credit spreads.
The remainder of the paper is organized as follows. In the next section, we review the relevant literature, separated into several streams that affect different parts of our research question. In Section 3, we describe our dataset, the setup of empirical tests and empirical findings. Our paper ends with a conclusion and summary in Section 4.

نتیجه گیری انگلیسی

In this study, we examine whether sovereign risk matters in EMU corporate bond markets. We utilize a sample of 897 bonds from March 2006 to June 2012, thus covering a period characterized by uncertainty and financial distress for both countries and companies within the EMU. Evidence from emerging markets' corporate bond ratings and spreads suggests that sovereign risk should also matter (or has started to matter recently) in the EMU, which is currently undergoing a substantial sovereign debt crisis that entered a critical phase starting in early 2010. Our study adds to the existing literature in several ways. We use z-spreads for sovereign and corporate bonds to draw our conclusions, thereby explicitly considering the term structure of interest rates, which has been ignored by most of the previous studies. Our sample focuses exclusively on the linkage between sovereign and corporate risk in developed countries and within a monetary union. We utilize ratings and z-spreads, uncovering interesting differences between these setups.
We show that sovereign risk does indeed matter for corporate bond risk within the EMU. Higher sovereign risk is associated with higher corporate risk. Results are statistically highly significant for both ratings and z-spreads. In addition, we find that the influence is stronger for companies with domestic revenue structure, for companies that are (partly) owned by the government and companies active in the utility and transportation sector. With regard to ratings, the effect of sovereign risk on corporate risk is lower in the sovereign debt crisis period and higher for z-spreads in the same time period. Sovereign risk has a stronger effect for Southern European crisis countries, which is only statistically significant in the z-spread setup. Rating agencies seem to take a more differentiated view on individual company risk, while investors want to reduce their exposure to a country in financial distress as a whole, regardless of whether sovereign or corporate bonds are held.
Several possible extensions of this study are worth pursuing. An examination of how equity and debt respond to sovereign risk would be an interesting topic of further research. Are they affected differently, and what factors cause these differences? From a methodological standpoint, a sample of EMU corporate bonds OAS could be utilized instead of z-spreads, which Cavallo and Valenzuela (2010) have done for emerging markets. This would enhance sample size, as bonds with embedded options could be included.
Table 2 provides summary statistics (mean, median and standard deviation) on key bond and issuer characteristics. Information on bond and issuer characteristics is obtained from Bloomberg and Standard & Poor's.
Table 3 presents the results of a comparison of corporate bond ratings with ratings for corresponding countries for the following three time periods: pre-Lehman Brothers bankruptcy, financial crisis and sovereign debt crisis. CORP rating > SOV rating denotes the number of bonds that have a higher rating than their corresponding country in at least one quarter in the respective time period. CORP rating = SOV rating denotes the number of bonds that have an equal rating compared to their corresponding country in at least one quarter in the respective time period and that have not already been accounted for in CORP rating > SOV rating. Information is obtained from Bloomberg and Standard & Poor's.
Table 4 presents coefficients and standard errors from pooled time-series, cross-sectional regressions of quarterly corporate bond ratings on quarterly sovereign ratings and different combinations of control variables. The full econometric specification is given by: RCitcs = α + β1RSct + β2Xit + β3Yct + β4Zt + β5Pc + β6Ds + εit, where the quarterly rating RCitcs for corporate bond i at time t issued by a company from country c and active in industry s depends on the quarterly rating of the corresponding country RSct, a set of company-specific, time-varying variables represented by Xit, a set of country-specific, time-varying macroeconomic variables represented by Yct, a set of global, time-varying variables represented by Zt, and dummy variables for country and industry, Pc and Ds, to account for potential fixed effects. For reasons of clarity and readability, Pc and Ds are not reported in Table 4. Standard errors are clustered by country and time. The sample period is from March 2006 to June 2012. In Models II and III, several macroeconomic observations have been missing for the last quarter of our sample, which reduces the number of observations compared to Model I. Information is obtained from Bloomberg and Standard & Poor's. *, **, *** indicate significance at the ten percent, five percent and one percent level, respectively.
Table 5 presents coefficients and standard errors for Sovereign rating and several interactions terms from pooled time-series, cross-sectional regressions of quarterly corporate bond ratings on quarterly sovereign ratings and different combinations of control variables. The full econometric specification (results not presented in Table 5), which has been expanded by the interaction terms, is given by RCitcs = α + β1RSct + β2Xit + β3Yct + β4Zt + β5Pc + β6Ds + εit, where the quarterly rating RCitcs for corporate bond i at time t issued by a company from country c and active in industry s depends on the quarterly rating of the corresponding country RSct, a set of company-specific, time-varying variables represented by Xit, a set of country-specific, time-varying macroeconomic variables represented by Yct, a set of global, time-varying variables represented by Zt, and dummy variables for country and industry, Pc and Ds, to account for potential fixed effects. Model III from Table 4 has been selected as baseline regression. Sovereign rating × Domestic revenue share interacts Sovereign rating with a dummy variable taking a value of “1” if the domestic revenue share is more than 50%. Sovereign rating × Government influence interacts Sovereign rating with a dummy variable taking a value of “1” if ten percent or more of the company is owned by the government or government-related entities. Sovereign rating × Period I and Sovereign rating × Period III interact Sovereign rating with dummy variables taking values of “1” for the time periods March 2006 to June 2008 (Period I) or June 2010 to June 2012 (Period III). Sovereign rating × Southern Europe interacts Sovereign rating with a dummy variable taking a value of “1” if the company is located in Greece, Italy, Portugal or Spain. Sovereign rating × Telecommunication, Sovereign rating × Transportation, Sovereign rating × Utility, and Sovereign rating × Other interact Sovereign rating with the respective industry. Standard errors are clustered by country and time. The sample period is from March 2006 to June 2012. Information is obtained from Bloomberg and Standard & Poor's. *, **, *** indicate significance at the ten percent, five percent and one percent level, respectively.
Table 6 presents coefficients and standard errors from pooled time-series, cross-sectional regressions of quarterly corporate bond z-spreads on quarterly corresponding benchmark sovereign bond z-spreads and different combinations of control variables. The full econometric specification is given by ZCitcs = α + β1ZSit + β2Wit + β3Xit + β4Yct + β5Zt + β6RCit + β7RSct + β8Pc + β9Ds + εit, where the quarterly z-spread ZCitcs for corporate bond i at time t issued by a company from country c and active in industry s depends on the quarterly z-spread of the corresponding benchmark sovereign bond ZSit, a set of bond-specific, time-varying variables represented by Wit, a set of company-specific, time-varying variables represented by Xit, a set of country-specific, time-varying macroeconomic variables represented by Yct, a set of global, time-varying variables represented by Zt, corporate bond and sovereign ratings RCit and RSct, and dummy variables for country and industry, Pc and Ds, to account for potential fixed effects. For reasons of clarity and readability, Pc and Ds are not reported in Table 6. Standard errors are clustered by country and time. The sample period is from March 2006 to June 2012. Information is obtained from Bloomberg and Standard & Poor's. *, **, *** indicate significance at the ten percent, five percent and one percent level, respectively.
Table 7 presents coefficients and standard errors for Sovereign z-spread and several interaction terms from pooled time-series, cross-sectional regressions of quarterly corporate bond z-spreads on quarterly corresponding benchmark sovereign bond z-spreads and different combinations of control variables. The full econometric specification (results not presented in Table 7), which has been expanded by the interaction terms, is given by ZCitcs = α + β1ZSit + β2Wit + β3Xit + β4Yct + β5Zt + β6Pc + β7Ds + εit, where the quarterly z-spread ZCitcs for corporate bond i at time t issued by a company from country c and active in industry s depends on the quarterly z-spread of the corresponding benchmark sovereign bond ZSit, a set of bond-specific, time-varying variables represented by Wit, a set of company-specific, time-varying variables represented by Xit, a set of country-specific, time-varying macroeconomic variables represented by Yct, a set of global, time-varying variables represented by Zt, and dummy variables for country and industry, Pc and Ds, to account for potential fixed effects. Model IV from Table 6 has been selected as baseline regression. Sovereign z-spread × Domestic revenue share interacts Sovereign z-spread with a dummy variable taking a value of “1” if the domestic revenue share is more than 50%. Sovereign z-spread × Government influence interacts Sovereign z-spread with a dummy variable taking a value of “1” if ten percent or more of the company is owned by the government or government-related entities. Sovereign z-spread × Period I and Sovereign z-spread × Period III interact Sovereign z-spread with dummy variables taking values of “1” for the time periods March 2006 to June 2008 (Period I) or June 2010 to June 2012 (Period III). Sovereign z-spread × Southern Europe interacts Sovereign z-spread with a dummy variable taking a value of “1” if the company is located in Greece, Italy, Portugal or Spain. Sovereign z-spread × Telecommunication, Sovereign z-spread × Transportation, Sovereign z-spread × Utility and Sovereign z-spread × Other interact Sovereign z-spread with the named industry. Standard errors are clustered by country and time. The sample period is from March 2006 to June 2012. Information is obtained from Bloomberg and Standard & Poor's. *, **, *** indicate significance at the ten percent, five percent and one percent level, respectively.
Figs. 1 and 2 provide information on the distribution of the issuer's country and the issuer's industry for the whole sample of 897 bonds. Data is obtained from Bloomberg.
Fig. 3 plots average corporate bond ratings against average corresponding sovereign ratings for the whole time period. The bubble size reflects the number of bonds per country in the sample. Information is obtained from Bloomberg and Standard & Poor's.